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Working Capital as Venture Funding?

In our last post, we noted the difficulty small gaming companies face when raising venture capital. Put simply, they cannot. At the same time, it has become very hard (i.e. expensive) for a game to gain enough traction to become a self-sustaining business – you know, the kind of business that pays its creators a salary.

So we have game development talent without funding, but a very large market. (And not for nothing, a market that is largely recession-proof.) Fortunately, market economies abhor a vacuum and we are starting to see the emergence of some new models for funding game titles.

The seemingly most obvious one of these is venture backers trading their investments for revenue share rather than straight equity share. This field is highly nascent, so there is no fixed model yet, just lots of experimentation. It is also an area that is off-limits for traditional venture investors. If you are doing this kind of work, please drop us a line.

Recently, we also came across another interesting model, this one pioneered by a firm called Pollen VC, based in the UK and in San Francisco. Pollen is not a traditional VC. Instead they make what are essentially working capital loans. This is a very staid, traditional area of finance, but it is something very different from traditional funding for start-ups.

To understand Pollen, we need to take a step back and look at the cash flow of a new game. Today, most games live or die in their first six moths, and usually within its destiny is written within the first 60-90 days of launch. For developers, this requires heavy, aggressive spending on marketing in it earliest days. From launch minus 5 days to launch plus 30 days, companies need to spend as much as they can to acquire users. Done well, this can lead to greater earlier growth and seed ‘word of mouth’ sales (aka organic growth). There is an art to ad spending here which borders on high-precision science, with a large pool of talented people who are experts at this sort of work. Think of this like a rocket, spend enough fuel early on and the rocket can escape gravity and go into a permanent cash-generating orbit. Without that, it will just come crashing back to Earth.

So companies need to have enough cash on hand in early days to pay for all that marketing, but there is a big catch. The leading mobile app stores pay developers on 60 (and sometimes 90) day terms. By the time a game gets its first revenue check it is largely too late to alter the title’s long-term trajectory. Well-capitalized companies can budget for this, but as noted, many gaming titles are small companies or passion projects of a few founders. So having that check from the app store can make a big difference in the long-term fate of the game.

Enter Pollen. Pollen works with founders to make a projection of a game’s revenue prospects. (They have some very handy tools on their website to help with this – like this LTV calculator.) They monitor a game’s early progress, and then lend the game company the amount of revenue share they would expect in the first month or two. Pollen collects on Day 60 and takes a very reasonable fee. This gives the small developer cash upfront which they can then use to market the game more aggressively, and hopefully pull free from gravity.

Again, for Wall Street, this is very straightforward, it is known as Accounts Receivables Factoring, and it has been literally been around for centuries (think Medici bankers). On the Street, it is so commonplace that is seen as somewhat boring. However, when applied to video games it is very new. The fact that this is not more widespread speaks to habit more than anything else. For digital companies, capital structures tend to be very basic – just a few flavors of equity with no debt. And for Street factoring practitioners, they are not familiar with the predictability of these games, they are more accustomed to lending against delivery of manufactured goods. Pollen has latched onto something very innovative by combining these two worlds.

This is not going to completely solve the larger problem of funding for game titles, but it can be tremendously helpful to new companies getting started.